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November 20, 2012

Add cable industry pioneer and Liberty Media Chairman John Malone to the growing list of people who think sports programming costs are out of control.

"We've got runaway sports rights, runaway sports salaries and what is essentially a high tax on a lot of households that don't have a lot of interest in sports," Malone said in an interview. "The consumer is really getting squeezed, as is the cable operator." Indeed, by some industry estimates sports programming now accounts for about half of the typical pay-television bill.

Malone, who has been an operator of cable systems and a programmer in his long career, said "the control of sports rights by a few entities has almost created a redistribution of wealth." The entities he was referring to include News Corp., which owns 20 regional sports networks (RSNs) and is launching a national service; Walt Disney Co., which owns the ESPN juggernaut; Time Warner, whose cable channels TBS and TNT carry baseball and basketball, respectively; and Comcast, which also owns almost a dozen RSNs.

The price of sports is only going to get higher. News Corp.'s Fox Sports is near a deal to acquire a 49% stake in the New York Yankees cable channel YES for more than $1 billion and will look to recoup that investment by increasing subscriber fees. Time Warner Cable just launched its own pricey RSN in Los Angeles and spent billions for Lakers rights and may end up in a bidding war with Fox Sports for the rights to the Dodgers. Competition between these media giants, Malone said, is "creating quite a bit of distortion in the valuation of sports rights."

Long known for his resistance to government rules and regulations, even Malone thinks it might be time for the Federal Communications Commission or Congress to step in. "The only way it is going to change in the short run is for government to intervene," he said. One solution, Malone said, is that more expensive services such as ESPN or RSNs be offered to consumers on an a la carte basis. ESPN, according to consulting firm SNL Kagan, costs more than $5.00 per subscriber, per month. RSNs are also very expensive. SNL Kagan said Comcast's SportsNet in Washington, D.C., costs more than $4.00 per month, per subscriber.

Ultimately though, Malone thinks technology, not government, will solve the problem. As more platforms such as Netflix and Hulu emerge and increase the quality of their content, consumers will have options beyond the current pay TV system in which large programmers bundle their content together into a one-size-fits-all package. "People will watch and pay for what they want, it is kind of inevitable," he said. "I can't forecast the future but usually markets have a way of correcting themselves." Los Angeles Times

Satellite-television operator Dish Network wants to come back down to earth. But it faces a host of obstacles threatening to impede its landing.

Dish hopes to use spectrum it owns in a ground-based wireless network that could compete against the likes of AT&T and Verizon Wireless. But in the 20-month process of awaiting approval from regulators to do so, it has missed opportunities to become a player in wireless consolidation. Back in August, Dish was apparently considering going it alone by buying MetroPCS . A filing released last Friday said that a company had offered $4 billion in cash and stock to purchase MetroPCS, a bid that the latter's board rejected as inadequate. The unnamed bidder was later reported to be Dish. With MetroPCS now slated to be acquired by Deutsche Telekom's T-Mobile USA, it seems Dish has little option but to partner with another carrier to defray the cost of building a network from scratch, which Sanford C. Bernstein estimates at $10 billion or more. Dish has more than $6 billion in cash on its balance sheet, ostensibly to invest in a network.

Even while considering a MetroPCS bid, Dish Chairman Charlie Ergen has been vocal about his interest in such a partnership, naming Sprint Nextel and T-Mobile as possible partners back in June. But that could be delayed until after the closing of recent deals between MetroPCS and T-Mobile and between Sprint Nextel and Japanese carrier Softbank. Moreover, no carrier is likely to partner with Dish until a decision comes from the Federal Communications Commission over whether Dish can use its spectrum for a ground-based network. Approval is expected before the end of the year. But the commission may also heed petitions from Sprint to restrict a piece of Dish's spectrum to protect against interference with a neighboring spectrum band, which Sprint says it wants to buy.

Dish says this change would force it go to back to another body that approves the technical specifications for undeveloped spectrum to seek a new round of approvals, potentially costing it another year. Dish, which lost a net 19,000 TV subscribers in the third quarter, has taken a different tack in attempting to build another business to sustain it for the future. Its peer DirecTV has instead been using its cash to buy back shares. But extensive delays surrounding Dish's wireless plan could begin to weigh on the stock. Dish shares are up 42% over the past 12 months, and it now trades at a rich 15 times 2013 earnings estimates. DirecTV is up only 5% over the same period and trades at 9.6 times earnings.

Dish's premium could reflect lingering hopes that it will decide to sell off the spectrum, whose value Bernstein estimates at about $8 billion, equivalent to 50% of the company's current market capitalization. Mr. Ergen has said this isn't his intention. Taking him at his word, there may also be another hope out there: that a larger carrier such as spectrum-hungry AT&T will simply make a bid for the entire company. Without that, it is hard to see why investors would buy into gridlocked Dish at this stage. Wall Street Journal